Hungary
chapter from book “The State of the Union” published by The Stockholm Network, 2005
Hungary was once a leading reformer among the formerly Communist nations of Central and Eastern Europe, and a darling of foreign investors. However, its energy is waning and the country seems to be resting on its laurels – distracted by internal political battles – while its neighbours have surged ahead and now attract much more international attention.
Hungary went through a brief political crisis in August 2004. The two year old socialist-liberal coalition government fell and was replaced by a partially new cabinet, supported by the same two parties. A new prime minister emerged, in the energetic, 43-year-old form of Ferenc Gyurcsány, a millionaire businessman turned politician. The new government has demonstrated sufficient competency to reassure international investors of the stability of Hungary’s economy. Equally important was the survival of Finance Minister Tibor Draskovics, a fiscal conservative, in the cabinet. However, elections scheduled for the spring of 2006 mean that little reform will be undertaken in the coming year, and a glance at the three most popular parties suggests that whatever the composition of the next government, there is not much hope of post-electoral reform either.
Mr Gyurcsány’s rise to the premiership reflects the growing influence of the youthful, reformist wing of the Socialist Party, which has distanced itself from older Communist doctrines. However, they have retained their centralising instincts and are beholden to a traditional leftist voter base. The main opposition party, Fidesz – who enjoy roughly the same level of popular support as the Socialists – would be still less likely to enact market-oriented reforms, despite claiming to be a centre-right party. During their last period of office (1998-2002), they pursued statist policies, and in opposition have continued to voice their disdain for the free market, foreign investment, globalisation and economic liberalism. The only political party committed to market-oriented reform is the Liberal Party (SZDSZ), who are currently serving as the Socialist’s coalition partner. The smallest of the three major parties, the SZDSZ has previously lobbied for tax cuts and the reform of the healthcare system and public administration. However, the party is too small to lead the next government, and lacks the internal unity and strategic cunning to exploit its kingmaker status. Also, party indiscipline has precluded fruitful coalition relations in the past. Indeed, it was the SZDSZ’s unfocussed machinations that caused the August 2004 crisis.
Sticking plaster reforms
The state of Hungarian healthcare is the stuff of local legend. Tales abound of underpaid, overstressed doctors accidentally performing operations on the wrong person, of marathon waits in casualty departments, and of inpatients having to take their own soap and toilet paper into the ward. Yet the average Hungarian remains staunchly in favour of a free national healthcare system, while paradoxically engaging in the endemic practice of paying additional doctors’ ‘fees’ under the table.
Private companies are allowed to enter the market, both to set up their own health facilities or to buy existing state ones and collect public money in exchange for keeping services going. The private sector has predominantly opted for the former option, and private healthcare has rapidly grown in popularity among rich Hungarians and foreign visitors. Only a small number of previously public hospitals have been privatised under the (latter) scheme. Yet this relatively slow, and certainly low-key, process of change was still the subject of one of 2004’s noisiest, most costly, and ultimately fruitless political debates.
In November 2002, the Socialist-Liberal coalition attempted to pass a law altering the rules for hospital privatisations. And while the law was rejected by the Constitutional Court for technical reasons, it did not prevent the far-left, non-parliamentary Workers’ Party – soon joined in an unholy alliance by the supposedly rightist Fidesz – from vilifying the Socialists for wanting to “start” privatising the sector. Over the course of 2004, two attempts were made to hold referenda to bar private capital from the chronically indebted health sector. Medical unions applauded the initiative, citing fears that the public service would suddenly be taken over by profit-obsessed capitalists. Yet when the referendum was eventually held in December, the turnout was only 37.44% – well short of the 50% needed for validity, but of those who did vote, a majority (65%) agreed that healthcare privatisation should be halted.
Small state, big state
In the broader picture, public sector cuts made by Mr Draskovics have succeeded only in provoking rage among the traditional opponents of reform, and have failed to convince the business and investment community that real savings are being made. Western diplomats bemusedly recount how government officials have told them not to worry about the cuts, as everyone who is sacked will be taken up in some other branch of public service. Earlier in the year, the Budapest Business Journal noted that Hungary, with a population of 10 million, has 18 ministers. This compares very unfavourably with Austria (8 million / 12 ministers), France (60 million / 15 ministers), Germany (82 million / 14 ministers) and Poland (39 million / 17 ministers). The only EU countries with more cabinet positions than Hungary are Italy and Spain, and they have, respectively, six and four times its population. That 8 of Hungary’s ministries receive 92% of the total ministerial budget suggests there is scope to economise.
The government has even made attempts to extend its control over independent public bodies. Notably, in the closing weeks of 2004 it forced through legislation that gave the state greater sway in the composition of the central bank’s monetary policy council – a move that even invited the disapproval of the country’s largely ceremonial president. Nor is the government averse to social engineering, usually in the form of subsidized housing loans to selected groups of people. This particular benefit is most often extended to young families, who are coincidentally one of Hungary’s key voting groups. Such politicking reveals that, now they are in power, the Socialist-led government is only too keen to follow in their predecessors’ interventionist footsteps. Indeed, Fidesz’s return to power would likely exacerbate the situation further as they increasingly champion a stronger government welfare system and greater state interference in, for example, the pharmaceutical, agricultural and energy sectors.
A tragicomic example of the state of the Hungary’s finance is the game on the Ministry of Finance website, which allows players to manipulate the country’s spending priorities in order to demonstrate the difficulty of cutting expenditure. The game is accompanied by humorous pictures of patients, pensioners and young families who change their smiles to glum expressions when money is taken away from their respective schemes. Notwithstanding how preposterously easy it actually is to finds cuts among the massively over-supported programmes, the game (and particularly its emotive little characters) demonstrates how deeply ingrained attitudes about the state’s role are. The game’s premise does not even entertain the notion that people would enjoy better lives if the state stopped taxing them into the ground and allowed private service providers to develop.
The excessively interventionist style of government advocated by both left and ‘right’ is supported by a punitive tax and social security system, which continues to deter investors while Hungary’s neighbours attract massive foreign direct investment. Corporate tax is relatively low at 16% but Hungary’s VAT is among the highest in Europe (25%). Additionally, all businesses must pay a curious levy, called the ‘local business tax’, to the authority governing the part of Hungary in which they are registered. The amount payable is calculated as a proportion (typically 2%) of total revenue, not profit, and is harmful to high-turnover businesses, particularly in the labour-intensive retail and R&D sectors. Even employment is costly, as employers must pay five different taxes and contributions on each employee every month.
The SZDSZ has lobbied the Socialists for tax cuts, which may be one of the reasons why the government continues to promise to lower the burden. Yet actions speak louder than words, and one of Mr Gyurcsány’s first acts upon taking over as premier was to increase corporate tax specifically for banks and financial institutions, a senseless, rabble-rousing move that earned scorn from the business community.
But there is reason for hope. A simplified and voluntary tax system for certain entrepreneurs and small businesses, subject to government criteria, was introduced at the beginning of 2003. Under this new tax regime, the only contribution to state coffers these players have to make is a flat 15% of their profits. It has proved popular, not to mention lucrative, and represents clear proof that simplifying, or indeed lowering, taxes can actually increase revenue. In 2004, the government widened the field of businesses eligible to participate in the scheme – and it has promised to do the same in 2005.
